Aave is the largest DeFi lending protocol in the world - with more than $24 billion invested in the protocol overall at the time of writing. Investors can lend, borrow, conduct flash loans, stake and more on the platform offering some bountiful yields. But your tax office will want to know about your Aave investments and take their cut. We’ve got you covered with everything you need to know about Aave including how it works, Aave taxes and more.
What is Aave?
Aave can refer to two things - the DeFi protocol itself or the native governance token of the Aave protocol (AAVE).
Aave is the leading decentralized lending protocol. It’s built on the Ethereum blockchain (also it’s also now deployed on the Polygon and Avalanche blockchains). Investors can borrow and lend a wide variety of cryptocurrencies, as well as stake AAVE tokens to get more AAVE.
Aave was set up back in 2017 as ETHLend, so it’s practically an old timer for the DeFi market. The idea was to allow investors to lend and borrow without a third party - like a crypto exchange. They’ve now achieved all of this through liquidity pools.
How does Aave work
Aave is what’s known as an algorithmic money market. This means instead of matching loans to lenders and borrowers, loans are obtained from a liquidity pool. So investors both add liquidity to a given pool to loan their assets or borrow crypto from a pool.
The borrow APR (interest rate) and deposit APY (yield percentage) are dependent on the utilization rate of the assets in the pool. This means if nearly all the assets in the pool are utilized (by being borrowed) the borrow APR and deposit APY will be high. Whereas if the pool has more liquidity as most of the assets aren’t utilized the borrow APR and deposit APY will be low.
When you lend crypto on Aave, you’ll get aTokens in return to represent your asset in the pool. You’ll get aTokens at a 1:1 ratio based on your deposit, so say you deposit 1000 DAI, you’d get 1000 aDAI back. Your earnings are paid in the same manner, in that when your deposit increases, you’ll get additional aTokens representing this increase.
For some specific pools, you’ll also get additional tokens for adding liquidity. For example, lenders who currently deposit to the WETH.e pool on Avalanche will receive WAVAX tokens. This incentivizes users to add liquidity to new pools.
When you borrow crypto on Aave, you’ll need to put up collateral (unless you’re making a flash loan). You don’t have to put up the same crypto you’re borrowing as collateral and that’s a lot of the appeal for investors. It means they can still hodl a given crypto, but access other cryptocurrencies to invest in other DeFi platforms, for example Yearn.Finance. Excluding flash loans, all loans on Aave are overcollateralized - this means you need to deposit more than you want to borrow. This protects lenders from the volatility of the market, so if the value of your collateral falls below your borrowed crypto - your collateral liquidates.
Flash loans are a specific product on the Aave platform. These loans are uncollateralized - but you can only use them to make one transaction. So you can borrow a large amount of crypto, provided you return the loan within the same transaction. This is ideal for arbitrage traders - who balance prices of different cryptocurrencies across different platforms.
How do you use Aave?
The easiest way to access Aave is with a browser wallet like MetaMask, Trustwallet or Enjin as these can be configured to support all blockchains on Aave.
Once you've connected your wallet, just choose whether you want to deposit (lend) or borrow and find the pool you'd like to add to/borrow from.
What can you do on Aave?
As we’ve explained above, the main function on Aave is lending and borrowing crypto, so you can:
- Lend your crypto by depositing it to liquidity pools and earn interest (as well as additional tokens sometimes).
- Borrow crypto from liquidity pools by using your own crypto as collateral.
- Take out flash loans of crypto with no collateral for arbitrage opportunities.
There’s also a couple of other features in the Aave protocol that investors love.
Staking on Aave
You can stake your AAVE tokens within the platform to earn more Aave. When you stake AAVE, your AAVE tokens get locked up in Aave’s ‘safety module’. This is a reserve fund incase of a shortfall event - so there is risk to staking you should be aware of before you lock up funds.
Once you’ve staked your AAVE tokens, you can monitor your AAVE token rewards and claim them at any point. At the time of writing, you can earn 7.11% APY.
When you want to unstake your AAVE, you’ll have a cooldown period of 10 days before you can withdraw your funds. When you withdraw your funds you trade your stkAAVE back for AAVE tokens.
Meet Aave’s adorable foray into gamified DeFi - the Aavegotchi. Aavegotchi's are playable NFTs that are created by staking DeFi tokens directly into the NFT. Your Avavegotchi will generate interest based on your staked DeFi tokens. It'll also increase in skill (kind of like Axies) based on your interactions with it, so you can later sell your Aavegotchi on the Bazaar marketplace, or buy a new one.
The AAVE token is Aave’s governance token, but you can trade, sell and buy AAVE tokens on most decentralized and centralized exchanges. You can also use your AAVE token to vote on various proposals for the Aave protocol.
There's a few different ways you can invest on Aave and there's not much clear guidance from tax offices just yet as to how your Aave investments might be taxed.
What this means is, we need to interpret the current crypto tax rules and apply them as best as we can to Aave investments. Let's get into it.
Do you pay taxes on Aave?
Yes. Your Aave transactions are taxable and you'll need to pay tax on them.
The tax you'll pay all depends on the specific transaction you're making - but you'll pay either Income Tax or Capital Gains Tax. Let's break it down.
Do you pay tax lending crypto on Aave?
The IRS and other tax offices haven’t given clear guidance on the tax implications of DeFi lending protocols yet - so it all comes down to how your specific lending protocol works.
When you lend crypto on Aave, you deposit an asset into a specific liquidity pool. In return, you get aTokens at a 1:1 ratio to represent your deposited crypto.
This could be seen as a crypto to crypto trade from a tax perspective, which is subject to Capital Gains Tax.
Do you pay tax on lending interest on Aave?
When you lend crypto on Aave, you receive crypto in return for doing so.
For most liquidity pools, you’ll receive new aTokens representing your earned crypto from your deposit. As you’re receiving new coins, as opposed to making a trade, this could be seen as a kind of additional income and subject to Income Tax. You may need to pay Income Tax on your aTokens based on the fair market value at the time you receive them.
If you’re depositing to a pool where you can earn additional tokens for providing liquidity, similarly you earn new tokens for doing this and you can claim these tokens at any point. This could be seen as a kind of additional income and subject to Income Tax.
Do you pay tax borrowing on Aave?
There is no clear guidance from the IRS or other tax offices as to how borrowing through DeFi protocols might be taxed - so again, we need to look at how Aave works.
When you borrow on Aave, you’ll need to provide collateral. You do this by depositing crypto. We know from above that when you deposit on Aave, you get aTokens in return representing your asset in the platform. This could be seen as a crypto to crypto trade and therefore subject to Capital Gains Tax.
When it comes to paying your interest on Aave, as you’re paying your interest in crypto, this could be seen as spending crypto which is subject to Capital Gains Tax. However, it could also be argued that this is an investment cost, which would be tax deductible.
If your collateral liquidates, this could be viewed as a sale of your crypto and would be subject to Capital Gains Tax. You may be able to claim liquidation as a capital loss.
Do you pay tax on flash loans on Aave?
Flash loans work the same as any other crypto sale - albeit much faster. By making the loan, you’ll still be effectively purchasing and selling an asset. Any profits from selling crypto assets are subject to Capital Gains Tax.
Do you pay tax staking on Aave?
There is little guidance from tax authorities as to how staking rewards from DeFi protocols is taxed. However, rewards from other crypto activities like mining, referral bonuses and even airdrops are seen as a kind of additional income.
When you stake on Aave, you earn new AAVE tokens that you can claim at any time. Because you’re earning new tokens, this could be seen as a kind of additional income and subject to Income Tax.
Additionally, when you stake your AAVE you receive stkAAVE in return. There is a possibility that this could be viewed as a crypto to crypto trade from a tax perspective - which could be subject to Capital Gains Tax.
Do you pay tax on AAVE tokens?
AAVE tokens are treated just like any other cryptocurrency - which means they’re subject to Capital Gains Tax or Income Tax depending on the transaction.
If you sell or trade AAVE tokens - you’ll need to pay Capital Gains Tax on any profit you make as a result.
If you earn new AAVE tokens - you may need to pay Income Tax based on the fair market value of your AAVE token(s) at the point you receive them.
Do you pay tax on Aavegotchis?
Perhaps unsurprisingly, the IRS hasn’t yet issued guidance on playable NFTs. However, NFTs are treated like any other cryptocurrency from a tax perspective. This means:
- Buying an NFT: If you’re paying in crypto - this is a crypto to crypto trade and any gain will be subject to Capital Gains Tax.
- Selling an NFT: Selling an NFT, whether it’s for crypto or fiat currency is taxable. You’ll need to pay Capital Gains Tax on any profit from your sale.
As Aavegotchi is a kind of gamified DeFi - you’ll earn interest based on your staked DeFi tokens. The tax you’ll pay on interest all comes down to how you earn them - if it’s new tokens, it’s more likely to be Income Tax, whereas if you don’t realize any gain until you make a trade, it’s more likely to be Capital Gains Tax.
What do I need to report to my tax office?
It depends on where you live - each tax office has different reporting requirements for crypto.
In the US, you need to report each taxable crypto transaction on Form 8949, including:
- A description of the asset.
- The date you acquired the asset.
- The date you disposed of the asset.
- The sale price at fair market value.
- The cost basis of the asset at fair market value.
- Your capital gain or loss.
You’ll also need to report your net capital gain and loss on Schedule D and any crypto income on Schedule 1 and potentially Schedule C.
It’s a lot of work. If you’re an active trader or an arbitrage trader on Aave and other DeFi protocols, the list of transactions you need to report can quickly ramp up into the thousands per financial year. You’ll need good records of all your Aave transactions with all the information - you can do this manually or with a crypto tax app. Let’s look at both.
How to do your Aave taxes
To get started with your Aave taxes - you need your complete Aave transaction history. There’s two ways you can do this.
- Use crypto tax software and connect to your wallet. You can use API to connect to the wallet you use to interact with Aave. This will automatically import your Aave transaction history to your crypto tax app, identify your taxable transactions and calculate your capital gains, losses and income.
- Get a CSV file of your Aave transaction history. You can’t download a CSV file from the Aave platform directly, but you may be able to download a CSV file from the wallet you’re using to interact with Aave. Alternatively, you can use tools like Etherscan to download a CSV file of your transactions. Failing this, you can create your own custom CSV file. You can then use this CSV file to identify your taxable transactions, capital gains, losses and income yourself.
Does Aave provide a tax report?
No. Aave doesn't provide a tax report. But you can generate an Aave tax report using a crypto tax app.
Does Aave supply a financial statement?
No. Aave doesn’t supply a financial statement.
How to generate an Aave tax report
You can either create an Aave tax report yourself or use crypto tax software to do it for you. Let’s look at both.
If you’re doing your taxes yourself, you need a complete transaction history from Aave for the financial year. As we said, there’s no way to get a CSV file from Aave directly, so you’ll need to either create your own or see if the wallet you use to interact with Aave has a download CSV file option. You’ll then need to identify each taxable transaction, the subsequent income or capital gain/loss and report this to the IRS using Form 8949 for capital gains and losses, Schedule D for net capital gains and losses and Schedule 1 for crypto income (and potentially Schedule C too for income).
If you're using a crypto tax app, this process is much simpler. All you need to do is sync the wallet you use to interact with Aave with your crypto tax app using API. Your crypto tax software will then identify your taxable transactions and calculate any capital gains, losses and income for you. You can then download a tax report specific to your location to hand over to your tax office - for example, you can download a pre-filled Form 8949 and Schedule D.
Aave CSV export
Aave doesn’t offer an option for users to download a CSV file of their Aave transaction history. However, you can create your own or see if the wallet you use to interact with Aave has an option to download a CSV file.
Aave tax API
The easier option is to use crypto tax software to get your Aave transaction history automatically imported via API.
All you need to do is sync the wallet(s) you use to interact with Aave. So for example, if you use MetaMask to invest on Aave, you would sync your MetaMask wallet with your crypto tax app.
We’ve got instructions on our integration pages on how to connect the most popular Aave wallets with Koinly.
Does Aave report to the IRS?
One of the many things investors love about the DeFi market is the anonymity. Most DeFi protocols - including Aave - don’t force you to complete KYC verification to invest, unlike many centralized exchanges.
You might think this means you’re in the clear as the IRS can’t link you to DeFi investments, but it’s not quite so clean cut. Many of the wallets you use to interact with Aave will ask you to complete KYC verification or link a debit or credit card. If your card has payments coming in and going out relating to crypto investments, the IRS is going to want to know about it.
Similarly, if you’re moving assets between Aave and centralized exchanges, many of these exchanges have KYC verification and share that data with the IRS.
The best way to stay tax compliant is to report your crypto taxes accurately.
If you’ve been wondering is Koinly a Aave tax calculator tool, the answer is, yes! Not only can Koinly import Aave transaction history, but Koinly can also calculate your Aave taxes in a format that makes sense for your country’s tax office. As a Aave tax calculator, Koinly is able to do a bunch of impressive tasks that save you time and can even save you from paying too much taxes.
- Koinly will import all your Aave trades including purchases, sales, swaps, income and more!
- Koinly will then convert your Aave transactions into your country’s currency, at fair market value. This in itself is a massive time saver.
- Finally, Koinly works out which of your Aave trades are taxable, and which are not - calculating your Aave gains/losses, crypto income and more. All of this is really important for being able to submit an accurate Aave tax return to your tax office.